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Can a self managed super fund be issued with unpaid units in a related unit trust. Where the issue price is to be paid at the discretion of the unit trust trustee. If the smsf cannot make the payment the units are cancelled.
Are you referring to the UNPAID PRESENT ENTITLEMENT of units in a related unit trust, which is basically units that an SMSF is presently entitled to receive from trust distributions but didnt actually receive? or, are you asking about a scenario where a related unit trust issues units to an SMSF trustee for no consideration for no other reasons but purely because they can?
If it's the latter, then this is quite clearly a non-arm's length transaction and therefore any resulting earnings derived under this arrangement will be subject to the highest MTR with no offsets. It will also likely cause a breach on the in-house asset limit of 5% (assuming this hasn't already been exceeded) and also a breach of section 66 of the SIS Act on acquisition of assets from related parties. (Basically there will be a lot of problems).
I would strong recommend you seek professional SMSF advice before you go ahead with the advice.
Hope this helps
Thanks for your comments.
I don’t believe the situation in non-arms length. With property devonpments it’s normal for funds to be required over time not all upfront. There is no breach of the in-house assets rule as there is an exemption for this. The unit trust is anew unit trust and the units have been issued directly to the SMSF. So no assets acquired from related party. The real question is “does the unit price payable/receivable result in a loan between the SMSF and unit trust?
This sounds like a reg 13.22C unit trust. If so, then:
There is no breach of the in-house assets rule as there is an exemption for this.
That would be the reg 13.22C exemption.
So no assets acquired from related party.
Actually yes, because the unit trust is a related party - but exempt as long as it satisfies all the conditions around reg 13.22C
The real question is “does the unit price payable/receivable result in a loan between the SMSF and unit trust?
No, but if the units are not issued for fair value then you have a failure of arms-length dealing
=> failure of reg 13.22C exemption => then it will be an in house asset.
Thanks for your comments.
The unit trust had no assets at the time of the issue of the units. The units were issues at par value $1 each unpaid until the unit trust requires the funds to proceed with the development. So I would assume that this fair value.
If the initial units are issued at $1 each, then the find needs to pay $1 each into the fund bank account - that is issue at fair value.
That process can continue until land has been purchased, after which you may have a situation where you should value the existing units before issuing new units or transferring existing units.
Under superannuation law, only two types of related trust arrangement can be exempt from the in-house asset rule:
1. Pre-1999 unit trust. This is an old/legacy trust set up which can no longer be established since 12 August 1999. Existing pre-99 trusts are grandfathered and can be maintained indefinitely subject to rules and restrictions. One of the conditions is that additional investments in this trust were only permitted until 30 June 2009 -but only where the total value of the additional investment did not exceed the level of any outstanding loans held by that trust as at 11 August 1999. Therefore, this is unlikely it.
2. A reg.13.22C trust. - another name for this is non-geared trust. As the name gives away, to qualify as this type of trust there mustn't be any outstanding borrowings held by the trust itself. Additionally, the trustee of the unit trust must not be party to a lease with a related party of the fund unless the lease relates to business real property.
As Bruce pointed out, what you have is likely a reg. 13.22C trust (if we are certain that the in-house asset rule is exempt).
Whilst I can see your argument in saying that because the trust is currently without an actual physical asset to support the unit price of the units issued, therefore the units would technically be worthless in the SMSF. However, under the arm's length prinicple, the ATO considers that a dealing can only be on arm's length term where a transaction between two parties are carried out in such way that it's not anymore favourable to either party than could reasonably be expected if the transaction was at arm's length in the same circumstances. That is:
-none of the differences between the situations should be material ( i.e. if one party sells an asset for X dollars than the other party must pay for that much), or
-reasonably accurate adjustments can be made to eliminate the effect of any such differences.( i.e. if one party sells an asset for X dollars than the other party must compensate for that cost to balance out the effect)
To your case, it the units issued were valued at $1 each at market, then the SMSF receiving these units at nil cost could mean:
-It's treated as a loan to the SMSF, which would be in breach of section 67 of the SIS Act against the borrowing restrictions for superfunds, if the borrwing isn't reimbursed "immediately"(no timeframe is given as to how short this period must be but interpreting from the term alone I would have thought it's within a day or two), or
-It could be treated as a third party contribution which would be made in-specie (it must be allowable under the trust deed of the SMSF and in line with the investment strategy having regards to risk, liquidity and diversity) and taxed concessionally at 15% inside the SMSF and cannot be claimed as a tax deduction, or
-Non-arm's length transaction.
Once again, given the wide-spread possibilities and the ramifications, I strongly recommend you to perhaps seek professional SMSF advice for further clarification.
Hope this helps